Alaska Gasline Port Authority Proposal to Purchase Fairbanks Natural Gas LLC

The purchase of FNG by AGPA

The Fairbanks North Star Borough (FNSB) is currently considering authorizing the Alaska Gasline Port Authority (AGPA) to purchase Fairbanks Natural Gas LLC (FNG) as part of its proposal to truck natural gas from the Alaska North Slope to Fairbanks. In order to understand if that is a reasonable decision the FNSB needs to determine why AGPA is asking to purchase FNG. What is the goal they are trying to achieve, and what process should be followed to make that decision?

What is the goal the FNSB is trying to achieve or the value it is trying to protect?

The cost of energy has always been high in the Interior of Alaska. It is an important goal for the FNSB to ensure that future energy needs are met and that those needs are met in the most economic, cost-effective manner possible. The AGPA has proposed the purchase of Fairbanks Natural Gas LLC and the trucking of natural gas from the Alaska North Slope to Fairbanks as the method to achieve that goal. Before a decision on that issue can be made, several questions need to be answered in order to provide the context and justification for the decision, and a reasonable decision-making process needs to be followed to ensure a thorough analysis occurs. The decision should only be made to move forward with the purchase of FNG if the FNSB understands the economics and chance of success of the proposal and of the other alternatives available to the FNSB to meet its goal of long-term, low-cost energy.

What alternatives are available to meet future energy needs of the FNSB?

The AGPA has proposed the trucking of natural gas from the North Slope to Fairbanks as the most economic way to accomplish the goal of low-cost energy for the FNSB. Their proposal includes the purchase Fairbanks Natural Gas LLC (FNG) as a requirement to make that proposal a success. The assumption that trucking natural gas from the North Slope and the assumption that this necessarily means the purchase of FNG as a requirement to meet their goal must be tested against an analysis of the other viable alternatives available to meet the energy needs of the FNSB. This should be achieved through a reasonable agreed upon decision-making process. The following is a proposed process that could meet the need for a thorough analysis prior to making a decision of such magnitude.

What process should be followed before proceeding ahead with the FNG purchase?

First, compare trucking North Slope gas to all the other viable alternatives. Understand the proposed decision in context. For example, the cost of this alternative is substantially greater and the benefit (reduced energy cost) is substantially less than the benefit to the FNSB if a large diameter gas line is built. If a large diameter gas pipeline is built, the cost of energy from that pipeline will be substantially less than trucking natural gas from the North Slope to Fairbanks. But from a control and chance of success standpoint, trucking gas from the North Slope has a much greater chance of success than depending on TransCanada and the North Slope producers to build a large diameter gas pipeline.

The FNSB must also understand that if the utilities sign long-term contracts with FNG, the utilities will not need gas from the large diameter gas pipeline nor will the FNSB be able to benefit from a reduced cost of energy standpoint from a large diameter gas pipeline if it is successful. That doesn’t mean that the FNSB won’t receive any benefit from a successful large diameter gas pipeline, just that the FNSB will not be able to benefit from the reduced cost of energy that a large diameter gas pipeline would bring; the FNSB and the entire state will definitely benefit from a large diameter gasline from a jobs and taxes standpoint.

The economics of importing gas into Cook Inlet and building a gas pipeline from Cook Inlet to Fairbanks or trucking gas from Cook Inlet to Fairbanks should also be understood in comparison to the alternative AGPA is proposing.

Some have proposed building a small diameter gas pipeline from the North Slope as their preferred option. Will that project deliver gas to Fairbanks cheaper than trucking gas from the North Slope? What are the chances of that project moving forward to successful completion?

Other viable energy alternative should also be considered. Basic economics and the chance of success of each option should be the basis for any decision to move forward with an alternative.

In addition, a cost-benefit analysis of the proposed trucking option should be conducted. Assuming what GVEA says about cost savings is true and that electric bills will be reduced by about 6 percent and that 1,100 natural gas customers would save an estimated 30 percent on their electric bills, how much will be saved by the residents of the FNSB. Compare what would be saved each year over the term of the contracts to the cost of participating in the project. If the cost of the project outweighs the benefits of the project, it shouldn’t move forward with FNSB support even if it is the most viable alternative among those considered. This would be the no action alternative because none of the alternatives considered are worth supporting.

If trucking gas from the North Slope is determined to be the most economic viable alternative, what next?

If trucking gas from the North Slope is determined to be the most economic viable alternative, then the FNSB’s next decision is to what extent should the FNSB participate in the project in order to assure the project’s success.

A sovereign’s responsibility, as it relates to economic development, is normally to create a commercial environment where business can excel and grow while protecting the interests of the people. Only when a project is deemed to be essential for the benefit of the people and the business community is not willing to move forward with a project should the sovereign venture into participation in the economic arena and then only to the extent necessary assure the success of the project.

Once it is determined that participation by the sovereign in a project is essential to move a project forward, the next determination to be made is to what extent should the sovereign participate in the project. The sovereign should only participate in a project to the level necessary to accomplish the goal of moving the project forward. That participation could exhibit itself in the form of financing or ownership of any part of the project required to make the project a success.

If commercial entities had determined that the project was economic, they would have pursued the project and the AGPA wouldn’t have been given the option to participate. The FNSB, through participation of the AGPA will be required to participate by financing or ownership of the riskiest portions of the project because no commercial entity can be found to risk their capital on those portions of the project. No commercial entity can be found to take the investment risk necessary to participate in those portions of the project.

It is possible that no commercial entity can be found to participate in any portion of the project or that only a fully integrated ownership of the project makes the project viable for participation by the FNSB through AGPA. In that case there is one remaining step in the process to complete.

Valuation and purchase of the FNG asset.

If it is determined that trucking natural gas from the North Slope provides Fairbanks with the most viable low-cost energy alternative, and that no commercial entity wishes to participate in any portion of the project, or that an integrated operation is required to make the project viable, then purchase of FNG becomes a critical element in moving the project forward.

The last step is to properly value the FNG assets before a purchase offer is made or a purchase price is agreed upon. Project value should not be based on the value it ultimately brings to the FNSB, i.e., the value of the benefit to the people of Fairbanks over time. That could be tens of millions of dollars. The value should be based on what a commercial entity would pay for FNG in an arm’s length economic transaction. Based on this type of analysis a reasonable purchase price for FNG can be negotiated.

Summary

First, any action the FNSB takes in support of any proposal to bring natural gas to Fairbanks should be made in the context of how it accomplishes the goal of providing long-term, low-cost energy to Interior Alaska. At every stage of the process, what is being proposed and evaluated should be evaluated in the context of how it increases the likelihood of accomplishing the goal of long-term low-cost energy for Fairbanks. Don’t lose sight of the goal.

Next, if the above analysis is followed, and after careful and thorough economic and public policy considerations, the trucking option is chosen as a viable option to pursue, and ownership of the entire integrated operation is required, and a reasonable economic/commercial price is negotiated, then it may be reasonable to proceed ahead with this venture. But, to move forward with a project without a thorough analysis through a well-defined process is shortsighted and could lead to poor decision-making and increased risk of failure of the project. The FNSB needs to complete a thorough review of the proposal through a well thought-out process before it gives the green light for AGPA to purchase FNG.